Hedge Fund Return Downside deviation calc

Can someone please explain they get at EOC volume 5 page 128 downside deviation of 28.78 for HF? If it is in the book it can be on exam! Thanks

  1. look at fine print under table where they state 5% hedge fund benchmark return per year.

  2. that translates to 0.4167% per month.

  3. deduct 0.4167 from hedge fund monthly return.

  4. square those where difference is positive

  5. take square root of (sum of squares where the difference is positive/ # of entries where the difference is positive)

Thanks, I couldnt realise where they are getting that 5%…footnotes!

Cpk, as this is downside deviation should’t we square and then add these where the difference is negative (returns below 0.4167)?

I couldn’t replicate the actual result 86 as well but without actual calculations…for 8.6348 number…that page is quite comprehensive for HF return calc

Got it. We should only square the return is below the threshold of 0.41% and ignore the rest.

did you square the difference or only returns, which are below?

square the difference - gives you 28.78

I made a mistake on the denominator - it should use (n-1) = 11 to get a monthly downside deviation then mutliply by sqrt(12) to annualize.

You square each difference and then add all squared differences divide by n-1 and take a square root. Try EOC quite helpful or page 86.

I’ve done it. Didn’t think about how they arrived with this value though. Thanks for the feedback.